Taxation by Regulation and Regulation by Taxation: The Case of Local Cable TV Regulation

Until late 1986, municipalities played a major role in cable television regulation.Municipalities not only regulated pricing and quality decisions but also taxed cablesystems in the forms of in-kind and in-cash concessions. These activities appear tofit well with the concept of taxation-by-regulation, which concludes that consumerwelfare is reduced because of the rent seeking behavior of local politicians. At thesame time however, the notion of regulation-by-taxation is equally plausible. Thatis, politicians may use taxation as a means to regulate the activity of a monopoly bylimiting monopoly rents and improving consumer welfare. This article empiricallyseparates these two effects and investigates the implications for consumer welfare.